How Much Do I Need to Save Before I Can Start Investing?

This article is written as part of a DollarsAndSense.sg collaboration with For Tomorrow. For Tomorrow is brought to you by Temasek, in partnership with MoneySmart and DollarsAndSense. All views expressed in the article are the independent opinion of DollarsAndSense.sg.

While many Singaporeans would agree that investing is important, some may hold back thinking that only people with large savings or a considerable monthly income can afford to invest. This just isn’t true.

Instead, what you really should think about before you start investing is covering your bases in two main areas – building emergency savings; and paying off debt.

Building Emergency Savings

Building a savings buffer of between six and nine months of your living expenses is crucial. This safety net provides you with peace of mind, knowing that you will be able to cope with unexpected events in life such as losing a job or having to stop working for a short period of time to take care of yourself or a loved one.

Setting aside less than six months in savings may leave you at risk of not being able to tide through even short-term emergencies and keeping more than nine months’ worth of savings may pose an opportunity cost in terms of returns you could be earning with the money.

Pay Off High-Interest Debt

A key area to note is that not all debt are necessarily bad. It’s important to differentiate between good debts and bad debts. The way we see it, good debts such as a property loans can help you grow your wealth over time, as long as you are able to manage them.

Examples of bad debts would include credit card debts and personal loans that you may have. You should not start investing until you have cleared these debts as they may be carrying higher interest than the returns you can expect to receive from your investments.

The next thing you should do is ensure you have enough liquidity each month to continue paying for all your debt obligations. This is to prevent situations of having to liquidate investments in a hurry just to pay off debts you already knew you had.

In many situations, paying off money you borrowed from family members can also relieve both financial and psychological burdens on you.

Should I Invest All My Money At Once?

After covering your bases, you can start getting your money to work harder for you. As a new investor, choosing the best time to enter investments or putting all your money in from the start may not be the best strategy to begin your investing journey.

This is because even professional fund managers have a tough time predicting whether the markets are going to rise or fall. As a new investor, you would not have the time, energy or expertise to constantly monitor the markets for the best time to invest in or get out of the markets.

Passive Investing VS Active Investing

This should not scare you away. You can take a hands-off approach towards investing and embark on a passive investing strategy. This means you are investing for the long-term, disregarding short-term price volatility, and trying to achieve market returns rather than to outperform it.

There are several good reasons why passive investing is beneficial for new investors.

You don’t need to have extensive knowledge to get started nor do you need to spend a lot of time monitoring your investments. You can take advantage of active traders or savvier investors who are always trading, buying, and selling to accurately price the market in the long-term. Further, when you decide you’ve built up sufficient knowledge after some time, you can always choose to invest in individual companies that you believe will do well over the long term.

You’re able to remove your emotions from the equation, namely selling on fear when markets go down or selling too early when you see profits being made, only to miss out on the stocks that are truly worth keeping for the long term.

You can enjoy lower costs by choosing to invest in country or sector indexes for the long term rather than to rely on professionals who often charge a fee to actively manage your funds. One strategy is to get invested in the best companies via the Straits Times Index (STI) ETF, which is made up of the top 30 listed companies in Singapore.

Dollar-Cost Averaging

One strategy you can use to start passive investing is to employ dollar-cost averaging (DCA).

To give you a simple example, if you have $12,000 in savings, rather than investing all of it today, spread it over the next one year to invest $1,000 every month. Similarly, if you are saving up to invest, rather than save up $1,000 for 12 months before investing all at once, start this month and invest the $1,000 every month.

Over this 12-month period, markets will undoubtedly move up and down. What this means for you is that you buy more shares when prices go down and less when prices go up.

Investing For The Long-Term

The first thing you should do is ensure you stick to the plan. If you have decided to invest passively, don’t let media hype or a rumour lead you to do something you never intended to do when you started. Fear and greed can be powerful emotions that cloud our judgement.

You also need to review and improve your portfolio. Compare your investment returns against generic benchmarks such as the STI or even the CPF Ordinary and Special Account (2.5% and 4.0% respectively) to gauge how other investments are faring.

Over time, you may also choose to gradually invest in actively managed funds you see value in. You may even decide that you are good enough to identify investments that will outperform the market on your own.

At the end of the day, what makes the most sense is to start your investing journey early, regardless of how little money you think you have to invest. But always keep in mind that your investing journey is a marathon, not a sprint.